Kiwi is dumped after unemployment rate rises

Thursday 3rd February 2011

The New Zealand dollar was dumped after a weaker than expected employment report for the December quarter caused economists to rethink growth forecasts.

The unemployment rate rose to 6.8% in the December quarter from 6.4% in the three months to September. This is higher than the 6.5% to 6.6% the market was expecting. While seasonally adjusted employment fell 0.5% in the quarter when the market was positioned for 0.2% growth.

The NZ dollar fell sharply on the data, from around US77.75c when the figures came out at 10.45am to US77.25c by 11.30am. It was US77.37c in early afternoon trading, which is well down from US78.16c at 5pm yesterday.

"Despite a decrease in labour force participation, the large decline in employment drove the unemployment rate back up to 6.8%," Deutsche Bank said.

"We think that recent data means that some consideration should be given to reversing last year's policy tightening to provide greater assurance that a return to growth is close at hand especially with the Government intent on tightening fiscal policy settings at this year's budget, a policy we view as sensible," Deutsche Bank said.

Some analysts had tweaked their forecasts for the unemployment rate higher this week after the quarterly employment survey was bearish, said Westpac senior market strategist Imre Speizer. But the numbers were weaker than the recently reassessed expectation.

Moreover they suggested the economy was weaker than expected in the December quarter.

"Economists will look at forecasts for growth for the fourth quarter and they might revise it down a bit. We don't think it will go negative but people may push forecasts down to a 0.2% or 0.3% rise," Speizer said.

But US dollar direction would still be a factor in setting NZ dollar direction.

The NZ dollar edged down to 0.5600 by early afternoon from 0.5651 euro at 8am and 0.5642 yesterday. It fell to A76.52c in early afternoon trading from A77.35c at 8am and A77.14c at 5pm yesterday.

The trade weighted index slipped to 68.36 from 68.99 yesterday.

NZPA

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